A Simple Strategy For Day Trading Short Strangles On Stocks

When one buys an option in the stock market there are only three things that can happen and two of them are bad for the buyer. It goes your way right away which is good. It goes against you, which is bad. Or it goes sideways and time decay eats away the premium paid, which is bad.

It’s the same selling an option but much better because the time decay is on the seller’s side. If the stock goes sideways, the seller keeps the premium on the option. In other words, if one buys an option, one has a 66% chance of losing money; if one sells the option, it’s a 66% chance of making money.

So, obviously, it’s best to be on the sell side…

Simple as that?

Not so fast, if one does this without owning the stock, it’s called being “naked”, being naked a call, naked a put. Being nakedly short both the call and the put is a naked short strangle.

The trouble is the margin requirement on those are often times so high one might as well be trading the stock, and requirement often varies from brokerage to brokerage. So let’s say one might have to put up as much as $20,000 on a day trade with the prospect of making a couple of hundred bucks. A lot of risk, it would seem, for not much return. And it’s a day trade so there’s not all that much time to have the stock go your way or sideways.

But day trading is the key to this strategy.

First off, short strangles on volatile stocks can be extremely risky. If the price of the stock gets over the call strike or below the put strike, and runs, the loss can be virtually astronomical.

Day trading eliminates the overnight risk, and that is saying a lot. News after the market close, or just plain irrational exuberance in a volatile stock, can absolutely slaughter a short trader in strangles.

In addition, risk can be further controlled during the day, when the trade can be monitored, by using a tight stop-loss to guard against big price movements.

Secondly, with this day trading strategy the same expensive cash margin is being used over and over again anew each day and it usually is a lower requirement day by day as the strangle moves to the Friday expiration each week. But let’s say it’s an average $20,000 margin requirement…for simplicity’s sake.

This is a strategy that can be used on the weekly options for a any prominent stock — TSLA, AAPL, NFLX SHOP, NFLX BA, NVDA — with decent options liquidity and worthwhile price swings. And it’s a strategy that can be used week in and week out without ever having to buy the stock itself.

So what’s the result?

Today a TSLA a short 575/555 strangle gained $600 per strangle for the day trade. Let’s say one averages $600 per day through the week, and keep in mind both side the trade can expire worthless on Friday’s giving a big win (Friday’s are the best day obviously), yielding a weekly return of $3000.

A steady gain of 15% for the week, based on the $20,000 margin requirement without ever owning the stock. Multiply that by 52 weeks on same margin and…aw, you do the math.

This is just an example of how a trade can go. Other day trades (obviously) can be greater or less.

On the chart below the green dots are the price of the strangle, the green horizontal line at 21.66 is the price of the entry, the red horizontal line at 23.66 is the stop-loss, a $200 risk per strangle shorted. The white flag on the right axis is the profit for the the day trade. It is a negative number because it is a short.

(Click on the chart for a larger view)

#MarketTiming the #ShortList

#MarketTiming the #ShortList – Stocks UPDATED

The obvious stock sectors that are no-brainers for shorting largely because Covid-19 has put them either out of business for the immediate future or has severely hampered profit prospects for this year.

The most obvious are the cruise companies – NCLH, CCL, RCL – since it’s going to be a long time before they can pack a liner with either customers and crews. And now several of the key destinations have so enjoyed being tourist free there is talk they are not even going to allow the ships to dock and disgorge passengers like they were doing before the pandemic.

Next on the list movie theaters – AMC, CNK – since even if they open with social distancing they will at reduced audience capacity. Can they make profits on half a house or less?

It’s the same in the airline sector – AAL, UAL, DAL, LUV – less flights, less passengers, more trouble with the virus every hour of the day. Throw with BA too. No need to buy passenger planes when there are so few passengers and you have a fleet of excess airliners in storage.

Banks are on the short list too — JPM, GS, BAC, C, WFC – largely because they have lagged the rally from the March low for too long. That spells trouble not only for the sector but for the market as a whole. If the economy is going to tank and take the stock market with it (any day, week, or month now), it’ll probably, seriously, start the drop in the banks.

UPDATE: Am adding YELP and TRIP to the list. Without as much to review as they had before the pandemic, they have diminished prospects for the near term and maybe longer.

Coal stocks – BTU, ARCH, SXC, CNX – on the short list because the coal sector is always a short. It is not the fuel of the future and is becoming more and more not the fuel of the present. If ever there is a sector for swing traders to short every bounce this is it.

#MarketTiming – Adding #Banks to the #ShortList

I have already outlined the obvious stock sectors that are no-brainers for shorting largely because Covid-19 has put them either out of business for the immediate future or has severely hampered profit prospects for this year.

The most obvious are the cruise companies – NCLH, CCL, RCL – since it’s going to be a long time before they can pack a liner with either customers and crews. And now several of the key destinations have so enjoyed being tourist free there is talk they are not even going to allow the ships to dock and disgorge passengers like they were doing before the pandemic.

Next on the list movie theaters – AMC, CNK – since even if they open with social distancing they will at reduced audience capacity. Can they make profits on half a house or less?

It’s the same in the airline sector – AAL, UAL, DAL, LUV – less flights, less passengers, more trouble with the virus every hour of the day. Throw with BA too. No need to buy passenger planes when there are so few passengers and you have a fleet of excess airliners in storage.

I always have coal stocks – BTU, ARCH, SXC, CNX – on the short list because the coal sector always a short. It is not the fuel of the future and is becoming more and more not the fuel of the present.

Now I’m going to add banks as short prospects — JPM, GS, BAC, C, WFC – largely because they have lagged the rally from the March low for too long. That spells trouble not only for the sector but for the market as a whole. If the economy is going to tank and take the stock market with it (any day, week, or month now), it’ll probably, seriously, start the drop in the banks.

I’ve included DB on the chart panel below bacause it is a bank but it’s a somewhat separate case. Its price action is news driven since it has been the primary conduit for the money laundering between the Russian Oligarchs and the Trump Organization. Whether it is or is not going to have to pay for those illegal activities bats its stock price around more than banking fundamental alone.

The market sell off may have begun today with the NYMO putting in a high below a high on short-term breadth and the all important NYSI turning down (my key triggers) but with the FED meeting tomorrow, the timing is still a bit of a crap shoot.

(click on the chart panel for a larger view)

#MarketTiming – To short the usual suspects…

The general market has had a dandy little bounce the last two days and may continue to the upside into the holiday weekend.

But sometimes in the endless quest to detect “what happens next” it is not what is happening, but instead it is what is not happening.

Since most stocks in most sectors rally with a rising mass market those that don’t usually get hit the hardest with the market turns.

Since I think all of the market’s rallies now are bounces to be sold until the biggest reward comes when the realization sets in that there is nothing supporting this supposed bull market except the fumes in the Fed’s liquidity tank, I’ve taken a look around to what is not bouncing.

Really took just a glance around.

Didn’t have to look much past the usual suspects, the airlines, cruise ships, theater chains, and coal. Those first three sectors are severely distressed by the pandemic in this the worst of times. Coal is always a short even in the best of times.

Take a look at the two-day charts below to see the lack of bounce these last two days in all of these stocks.

AIRLINES — AAL, ALK, DAL, LUV, UAL, and most importantly, BA. Hope springs eternal in this sector but it does not fly. ALK has canceled 130 flights so far and mothballed 30 airliners. AAL and UAL, in desperation, have said they will fill their flights to capacity while others have said they have eliminated middle seating in an attempt to social distance, but it is doubtful the hordes of passengers they packed in previous to the pandemic will return any time soon. They are going to lose money, maybe on every flight. BA rallied yesterday on news of 737 MAX re-certification tests as if anyone is going to want to order that plane anytime soon, especially since most airlines are in the process of canceling orders (Norwegian Airlines canceled 97 orders today).

CRUISE LINES – CCL, RCL, NCLH. What’s there to say further? Can cheaply offered luxury cancel the memories of being trapped on cruises of contagion and death while the charlatan President of the United States, no less, says he would rather have passengers die there than muck up his Coronavirus positive case counts on shore? And what’s it going to cost to hire crew members for those voyages, if any crew can be hired at all?

THEATER CHAINS – AMC, CNK (which now owns Regal, the largest chain in the US). These movie theaters have a chance to make adjustment to cope with social distancing but still…even for the biggest blockbuster offering it will be irresponsible to operate at more than 50% capacity (if not illegal in some states). How much profit margin is there in half a house?

COAL STOCKS – BTU, ARCH, SXC, CNX. Coal, no matter how many times Trump says he loves it, has no sustainable future. Just compare the stocks in the sector to the solar stocks. On the next leg down, it looks as if BTU particularly may once again wipe out shareholder equity with yet another bankruptcy filing.

It’s going to take some market timing to pick the entries for when these stocks break down again. For me that’s watching what NYMO and NYSI, as my prime measures of mass-market psychology, are doing, but I assume anyone capable to shorting has their own indicators to rely on.

Regardless, when the time comes, I’m looking to take the slide down in what has now become the USA’s continued botched-coronavirus-response carnival.

(click on the chart for a larger view)

#MarketTiming – six days up and what now? – UPDATED

UPDATE: What now?

As suggested in the post below, I expected the market to move up this week, not as much as it did, but no matter.

Anytime one is on he right side of a six-day swing, either up or down, one cannot complain.

In this case, it’s six days up.

TQQQ, the 3x-leveraged and preferred trading ETF for the Nasdaq, gained 22% on the swing. Some major bellwether stocks have powered the six days, AAPL, MSFT, NVDA, AMZN FB, all up six days in a row; TWLO up six days and 73% on the move is by far the most spectacular example I follow.

Swing trading…what more can you say?

But what now?

This could stop right here. The NYMO was down today (see the chart below). How many times have we seen that mark the end, or at least a pause, after a four or more consecutive days up?

However, the all-important NYSI continues to rise so, unless this is going to drop right out of the sky, it’s probably a pause or a stall — it takes time to work off $2 trillion of Federal Reserve funny money spent in all the wrong places.

This has been a long spectacular rally since March, a fast up characteristic of bear-market rallies. If this is the end bullish traders and long-term investors who believe the bull market lives on will be in great danger.

If the market drops here and takes the NYSI negative, watch out…

An always remember there is no profit until you sell.

(click on the chart for a larger view)

Cruise lines stocks cruising to zero

I thought it strange this last week when the cruise-stocks had a bounce because, according to the news, NCLH (Norwegian Cruise Line Holdings) reported it was cutting crew, cutting expenses and had enough cash to last a year before going completely broke.

That lifted the entire sector?! Are investors paying any attention to this stuff?

At the moment, this sector, as everyone knows, as been in the pandemic news a lot. It is down 60% or so in the last three months.

No wonder.

Passengers and crew were trapped with a lethal virus in quarters nearly as tight as prisons and meat packing plants. There was the “celebrated” moment when President Trump stopped a Carnival Cruise liner from disembarking and made its passengers sit in a ship off San Francisco because he thought infection and death numbers would go up and hurt his his re-election chances.

Early on it was not known what the full implications of that was but now we know.

The Trump Administration, on orders from the boss, was botching the nation’s entire response to on-charging tragedy big time. The cruise companies, maybe more than any other industry, has been truly stuck between the most despicable President ever and the unforgiving deep blue sea. Even Joseph Conrad could not write this sea tale as disastrous as it is.

Right now, the stocks are basing (going sideways) to see what happens next. There is a lot of optimism they can recover once the economy reopens. That hope is so misplaced all I have to say to that is “Good Luck, fellas.”

Two massive problems currently rule the industry’s fortune.

Given all the bad news, customers are going to be a long time coming. Who wants to pay $5,000 to be on a floating death trap? At best, the cruise operators are going to have to give away the trips. At the risk of obvious understatement – let’s just say that will not be good for profits.

But the bigger problem might be who’s going to crew these ships?

Not only were the crews being infected and in some cases dying, but in addition, there are more than 100,000 still trapped on those ships worldwide who can’t get off, who can’t get transportation back to their home ports, who can’t see their families. These are people who have now have been quarantined for two months or more. They have long since realized nobody – not their employers, not the Trump incompetents, not the people they dutiful served — give a damn about them.

So the question arises are these companies ever going to hire any crews again, let alone experienced ones?

What a mess…

So just over that flat ocean horizon bankruptcy and the loss of all shareholder equity looms. Are investors paying any attention to this?

NCLH, CCL, RCL… Cruising to zero.

(click on the chart for a larger view)

$UAL $DAL $AA – time for buyouts instead of bailouts?

Bloomberg reported yesterday that the major American airlines used their free cash flow for buybacks and may be bankrupt by May.

See this CASH FLOW LINK and this BANKRUPTCY LINK.

Trump is already talking a taxpayer bailout.

How about buyouts instead?

Again and again, these industries (last time it was the banks) recklessly practice free-market capitalism and eventually a crisis comes and again they need a socialist intervention to go on with their business as usual.

Don’t these guys ever plan ahead? Don’t they ever realize all good times come to an end to one degree or another (all bad times too for that matter)?

Isn’t it time for this periodic sucking on the taxpayer tit stops? Maybe a lesson needs to be learned. If the taxpayer is going to have to subsidize and/or finally bail them out in the end, maybe it’s time the taxpayers take ownership.

Not that Trump would know what to do being on the opposite side of his own bankruptcy history but he won’t be President forever (at least I hope American voters have wised up enough to flush the con king).

Anyway, this is what these once high flying birdS look like crash landing together:

(click on the chart for a larger view)

#SectorTrading – when the bear bites everything bleeds

Got the bounce Friday in a frenzied last half hour as suggested Thursday in this post: #MarketTiming $SPY – Buy now, resell later….

No doubt it was primarily short covering but the rapidness of the run-up was bolstered by the announcement that the confused disingenuous Trump Administration is trying to catch up to the actual facts of the Covid-19 virus.

Trump and his team of appointed incompetents had no choice since the scientists within the CDC are coming to the fore and not putting up with the bullshit anymore, and Governors Jay Inslee of Washington State, who Trump called a “snake” (I guess because Inslee was teaching him leadership by example), Andrew Cuomo of New York and Gavin Newsom of Califonia, as well as hundreds of mayors across the country, who could not wait any longer on the dithering Feds, were moving aggressively to confront the virus in order to protect the citizens in each of their states and municipalities.

Regardless, this bounce, even if it becomes a rally is not going to last. As also noted in the post Thursday, the economic damage that’s begun hasn’t even begun to move through the market. Companies may begin warning this week of earning shortfalls.

There are going to be a lot of earnings shortfalls.

The S&P is down 16% for the year, even after Friday’s nine percent bounce. If is FINRA Margin Debt is unraveling (it’s reported a month late), and it probably is, and if history means anything, the S&P has another 30 or so percent to the downside to go over time. Margin calls feed on themselves as the calls bring more selling and more selling brings more margin calls.

The point is it is not buy-the-dips anymore, it’s sell the bounces. Friday’s was a big bounce. Did anyone sell or just started praying for more?

In the meantime, I thought I’d take a look at a few stock sectors I follow to see how bad it’s been even with Friday’s bounce in the numbers. Interesting among the biotechs: both REGN and GILD are up for the year so far, the only glimmers of green. Those are among the drug companies working on a vaccine for the virus. I will get to the tech stocks later. They have held up somewhat but the bear will bite them too before this is over. And the marijuana stocks…ah, the weeds, they are worthy of a blog post all their own.

The tables below are a year-to-date (less than three months). Take note of the percentage decline columns next to of the raging red bars:

BANKING STOCKS

HOUSING STOCKS

ENERGY STOCKS

COAL STOCKS

BIOTECH STOCKS

#MarketTiming $SPY – Buy now, resell later…

Gotta be a bounce if only because it can’t go down forever.

CNN Money’s Fear and Greed Index is at one. One. It can’t go below zero.

Forty-nine of my nifty-50 stock list are on sells with forty-eight of them oversold. I can’t remember 48 oversold all at once before.

The VIX is at 75. That is virtually a bear market momentum number.

The VIX leveraged ETFs, TVIX and UVXY, have been the stars of this market plunge. See the charts below. Since the NYSI downturn 13 trading days ago UVXY is up 40% and TVIX is up 72%

TVIX was at 40 when I posted this advance notice in January – $TVIX – Just a heads up… – and closed today at 399. Absolutely f-ing spectacular if I was so myself.

So what now?

This is a only a guess because I have no actual upturns anywhere – not in the NYMO, let alone the NYSI, not in price, not in volatility, definitely not in fear and greed but this exercise band is stretched so far, the market ether has to crash tomorrow or snap back.

I’m guessing the shorts cover only because they have made so much profit this week and it would be prudent to take some before the weekend.

Could be wrong.

President Incompetent could try to “reassure” the market again, or claim everything is hunky-dory again, or blame Obama again or blame the Fed yet again. (Hell, the Fed fought the NYSI mid-day today and lost that battle big time by the close.) Yes, yes he claims he knows a lot about the stock market but knows nothing so he slam the market down another thousand points or more…again

But if he shuts the tweet up…

My guess is it’s a buy now – not for the long term – and a resell later.

Regardless – tight stops.

(click on the charts for a larger view)